Public policy and the pharma industry

In a land where uncertainty abounds, one event that can be predicted with hundred percent accuracy is the shortage of medicines – a spectacle that we have witnessed with disturbing regularity. What explains these shortages, which are all the more perplexing given that the pharmaceutical industry consists of more than 700 production units? The answer primarily lies in the manner in which the pharmaceutical industry is regulated by the government.

Let’s start with the most damaging and illogical policy of ‘controlling’ prices. In Pakistan’s policymaking circles, the idea that prices can be controlled is very popular. In an earlier article published in these pages, I have tried to dispel this myth by pointing out examples that go as far back as the Roman Empire to point out this policy’s futility. Producers and sellers have a thousand ways of avoiding these controls and governments do not have the administrative capacity to properly enforce them for long. However, this lesson seems to be lost on our policymakers, especially those who are regulating the pharmaceutical sector.

In the case of medicines, the only thing price controls have achieved is the gradual destruction of the productive base of the industry; the flight of top-line multinationals; capital repatriation; the expansion of the black market and the loss of business confidence. Once labelled as a “sunshine industry” by McKinsey, with a potential worth billions of dollars, the pharmaceutical industry in Pakistan is now going through a difficult phase.

Consider the ‘price freeze’ on medicine prices between 2001 and 2012. In these years, the cost of production more than doubled. But the prices of medicines were not allowed to increase. The new policy that allows for a gradual price increase of medicines doesn’t do much good either. It is based on the Consumer Price Index (CPI), which is normally understated to avoid public scrutiny.

For producers and the industry, it is the cost of production that is of importance – something that can be captured by other measures like core inflation. Moreover, the policy is not being followed. This is evident from several cases that are lingering in the drug courts. A few years back, a general price increase was granted. This was taken back later due to a decrease in ‘public welfare’.

We can see the futility of this policy by understanding that producers will not produce medicines whose cost of production cannot be recovered (along with a certain profit). This explains why so many medicines have either become unavailable or are in short supply. Producers have either stopped producing them altogether or are producing them sparingly rather than on a regular basis. It is the consumer and patients who suffer in the end without even realising that government’s policies towards this sector are making life difficult for them. Official statistics suggest that in the years when the price freeze was being practised, the expenditures on healthcare (including those on medicines) kept rising. This is a clear testament to the failure of the policy.

A few years ago, a research by the PRIME Institute estimated that the losses incurred due to this policy exceeds Rs100 billion a year. The same institute carried out a survey in Rawalpindi and Islamabad in early 2017 regarding the shortage and non-availability of medicines. Suffice to say, the results painted a worrying picture, with even basic medicines like folic acid being in shortage.

So, why should we stick with this policy? There are three main reasons: a rudimentary understanding of the price theory; the presence of non-professionals at the helm of affairs; and political considerations. The willingness to carry out price controls is based on a naive belief that it does a great service to the people. But the facts, as pointed out above, speak otherwise. Medicines that are not readily available or are in short supply are ultimately found in the black market at almost three times the government-mandated prices. Does this sound like an attempt to enhance ‘welfare’?

Before the enactment of the current DRAP Act, a Senate Standing Committee worked meticulously on drafting this policy so that it could revive the industry. One of its recommendations was that only a professional person should be at the helm of affairs. By the time the draft reached the then PM, this suggestion had been changed to put a secretary as the authority in these matters. Such is the power of the bureaucracy.

The benign attitude of leaders and the media also adds to this. For our leaders, raising prices is akin to political suicide since they stand to lose votes. Then there’s the media that raises an unnecessary harangue whenever the prices of medicine rise by headlining percentage changes. For example, an increase in price from Rs5 to Rs10 is nothing substantial. But when it is converted into percentage, it’s a 100 percent increase, which is how the media tends to report it.

Some other regulations also defy logic. For example, pharmaceutical companies have to surrender two percent of their gross profits to the government’s coffers (since 1976) for ‘research and development (R&D)’. But the fact is that there has been zero R&D by the government in all these years. Pakistan does not have a single FDA- or WHO-approved laboratory. Yet this tax continues to be collected even though there is little or no information about where the money goes.Fec

Unfortunately, nobody within the government seems serious about tackling these issues. This can be amply gauged by the absence of the pharmaceutical industry in the CPEC initiatives. This is unfortunate since the global market for pharmaceuticals is in excess of $1 trillion and Pakistan’s share is a paltry $3.3 billion. Given that Pakistan’s top 100 firms are a qualified to produce quality products that could also be exported, it is perturbing to realise that the government is so non-serious about ameliorating the ills afflicting this sector.

Meanwhile, India’s pharmaceutical exports earn them more than $20 billion in export revenue. This only happened when their government did away with suffocating regulations and helped the industry by making them business-friendly.

The regulations introduced regarding the pharmaceutical industry in Pakistan have proved to be nothing short of disastrous. Those who negate this by pointing to the healthy growth of revenues of the top pharmaceutical companies fail to grasp that these revenues are a function of producing low-priced medicines in large quantities in the face of an ever-growing population, the increase in per capita income and the media’s role.

Regulations have little or no contribution in these revenues. Moreover, drugs for major ailments like cancer and hepatitis are not produced in Pakistan. Since there is no price incentive for firms to produce higher-priced medicines, they are usually in short supply. They are often imported or found on the black market much to the detriment of patients. This official treatment meted out to this industry quiet perturbing since it contributes to the government tax revenue.

In terms of the pharmaceutical industry, the main problem is of an ethical nature and the production of low-quality medicines by some firms. The collusion between medical practitioners and pharmaceutical firms is as prevalent in Pakistan as in other nations around the world. Moreover, the sale of spurious, counterfeited and low-quality medicines goes unchecked, especially in the countryside. This is where the federal and provincial regulators should have concentrated their energies. Unfortunately, the media and those who govern the country cannot appreciate the fact that a price increase is nothing compared to saving lives, which should the top priority of any government.

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